National Fuel Gas Company — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022. This is an annual report, not a standalone fourth-quarter filing. National Fuel is an integrated natural gas company with Exploration and Production, Pipeline and Storage, Gathering, and Utility segments, primarily serving the Appalachian region and western New York and Pennsylvania.
Financial performance and position
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Consolidated revenue | $2.186 billion | $1.743 billion | Up 25.4% |
| Operating income | $814.5 million | $639.9 million | Up $174.6 million |
| Net income | $566.0 million | $363.6 million | Up 55.7% |
| Diluted EPS | $6.15 | $3.97 | Up 54.9% |
| Operating margin | 37.3% | 36.7% | Calculated as operating income divided by revenue |
| Net margin | 25.9% | 20.9% | Calculated as net income divided by revenue |
| Cash from operations | $812.5 million | $791.6 million | Up $20.9 million |
| Cash capital expenditures | $811.8 million | $751.7 million | Cash from operations less cash capex was approximately $0.7 million |
- Segment net income: Exploration and Production $306.1 million; Pipeline and Storage $102.6 million; Gathering $101.1 million; Utility $68.9 million. Corporate and All Other recorded a combined loss of approximately $12.7 million.
- Balance sheet and debt: Total assets were $7.90 billion and shareholders’ equity was $2.08 billion at year-end. Long-term debt principal was $2.649 billion, including $549 million due in March 2023; short-term bank debt was $60 million. The reported credit-agreement debt-to-capitalization ratio was 0.49, against a 0.65 covenant limit.
- Liquidity: Cash and temporary cash investments were $46.0 million. The company had a $1.0 billion revolving credit facility and a $500 million commercial-paper program. It drew an additional $250 million under a delayed-draw facility on October 27, 2022, after year-end.
- Derivatives: Year-end derivative liabilities were $785.7 million, and hedging collateral deposits were $91.7 million. Margin posted during the year peaked at $430.6 million. These positions can make liquidity sensitive to commodity-price movements.
Material changes versus FY2021
- Exploration and Production earnings rose to $306.1 million from $101.9 million, principally on higher gas prices after hedging and increased production. Appalachian gas production increased to 341.7 Bcf from 312.3 Bcf; weighted-average gas price after hedging increased to $2.71/Mcf from $2.25/Mcf.
- Pipeline and Storage earnings increased to $102.6 million from $92.5 million, supported by the FM100 expansion entering service and higher transportation revenue. Gathering earnings rose to $101.1 million from $80.3 million, mainly on higher volumes.
- Utility earnings increased to $68.9 million from $54.3 million. The year included a $14.6 million after-tax benefit from a Pennsylvania OPEB regulatory adjustment; higher gas costs also increased reported utility sales and purchased-gas expense, which generally are passed through to customers rather than earned as margin.
- FY2021 included a $76.2 million pre-tax oil-and-gas impairment and a $51.1 million timber-sale gain; neither recurred in FY2022. FY2022 included a $24.9 million deferred-tax valuation-allowance reversal, a $28.4 million tax benefit from Pennsylvania tax-rate changes, and a $33.3 million after-tax loss from terminating crude-oil hedges following the California asset sale.
- The company sold Seneca’s California assets on June 30, 2022 for stated consideration of $253.5 million, including $240.9 million cash and contingent consideration. The sale concentrated production and reserves in Appalachia. Proved gas reserves increased 8% to 4,171 Bcfe; production was 352.5 Bcfe.
- Operating cash flow increased modestly, while cash capital expenditures also rose. The California sale generated $254.4 million of net proceeds from oil-and-gas property sales.
Outlook, risks and contingencies
- Management expected FY2023 operating cash flow to increase from FY2022 and projected operating cash flow to exceed capital expenditures in both FY2023 and FY2024, based on then-current commodity prices. Estimated capital expenditures are $885 million in FY2023, $875 million in FY2024, and $835 million in FY2025.
- Management expected to repay the $549 million of March 2023 debt maturities using cash on hand and short-term borrowing, and stated it did not anticipate long-term refinancing for those maturities. A $250 million short-term facility draw was planned to help fund a portion of the maturity.
- Pipeline and Storage firm contracted capacity is expected to decrease in FY2023 following termination of two nonaffiliated contracts totaling 300 MDth per day. The next specified Supply Corporation rate filing would be for rates effective February 2025 if no earlier case is filed.
- The Pennsylvania utility filed for a $28.1 million annual base-revenue increase in October 2022; approval and timing remained subject to regulatory review. The company also anticipated a possible Pennsylvania system-improvement charge following completion of the proceeding.
- The Northern Access pipeline project remains dependent on regulatory approvals. FERC extended the construction deadline to December 31, 2024; the company had spent $55.8 million and had not updated the approximately $500 million preliminary cost estimate or in-service timing pending greater clarity on approvals.
- Key risks include natural-gas price volatility and hedging-related collateral needs; project permitting and construction delays; customer and counterparty concentration (three E&P customers represented 38.9% of consolidated revenue); regulatory rate recovery; environmental requirements and climate policy; severe weather and infrastructure disruptions; and cybersecurity. The Inflation Reduction Act’s methane charge was expected to apply to qualifying emissions beginning with calendar-year 2024 reporting.
- The company reported $3.6 million of estimated remaining cleanup costs for former manufactured-gas-plant sites, expected to be recovered through rates. Other routine litigation and regulatory matters could affect earnings when resolved, but the company said an estimate of possible losses could not be made.
- PwC issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified proved natural gas reserve estimates as a critical audit matter; no FY2022 ceiling-test impairment was recorded, and the ceiling exceeded book value by approximately $3.2 billion.
Investor verification priorities
- Confirm the March 2023 debt repayment plan, including the use and maturity of the $250 million delayed-draw facility and available liquidity after repayment.
- Track hedge settlements, collateral requirements, and the expected reclassification of $476.7 million of pre-tax accumulated hedge losses into earnings within the next 12 months.
- Assess whether projected operating cash flow covers the $885 million FY2023 capital program, dividends, and debt needs under commodity-price scenarios different from management’s assumptions.
- Follow the Pennsylvania utility rate case and Supply Corporation and Empire contract renewals, including the 300 MDth/day capacity reduction.
- Monitor Northern Access permitting, cost revisions, and the project’s expected in-service date, as well as progress and spending on Appalachian development and gathering expansions.
- Review customer concentration, reserve assumptions, climate and methane compliance costs, and the sensitivity of earnings and liquidity to gas prices and hedging activity.